United States: Regulation Crowdfunding

Crowdfunding is a relatively new means through which businesses or individuals can harness the reaches of the internet to raise capital by seeking small individual contributions from a large number of people. Crowdfunding has been utilized to fund clothing start-ups and artistic endeavors, and even President Barack Obama's 2008 presidential campaign, whereby President Obama raised over $200 million in singular donations under $200.1 Typical crowdfunding transactions have generally involved financing a particular project in expectation of receiving a tangible reward relating to such project — a music album, for example.

Crowdfunding has generally not involved the offer to share in the profits generated from the activities financed through such crowdfunding. This model of crowdfunding, referred to as the "equity model," would likely trigger the application of federal securities laws as it would likely involve the offer and sale of securities to the public. Absent an available exemption, the small businesses and startups seeking to utilize the equity model of crowdfunding to fund a particular endeavor would need to register the securities offered prior to any offer or sale under the Securities Act of 1933, as amended (the "Securities Act"). The costs associated with conducting a registered offering of securities relative to the aggregate amount of capital typically sought by small businesses and startups, and the limitations applicable to conducting an offering exempt from registration, have generally been cited as the key factors that have prevented the equity model of crowdfunding from being effective and practical for small businesses and startups.

Title III of the Jumpstart Our Business Startups Act (the "JOBS Act"), established the regulatory framework for small businesses and startups to raise capital using the "equity model" in a less costly manner by offering securities over the internet. Title III exempts from registration crowdfunding transactions that (i) meet certain volume limitations, (ii) are conducted by issuers who comply with certain disclosure, conduct and ongoing reporting requirements, and (iii) are conducted through a regulated intermediary. Congress directed the Securities and Exchange Commission (the "SEC") to issue rules necessary and appropriate to carry out the provisions of Title III (such rules, collectively, "Regulation Crowdfunding"). Notably, and in contrast to the relatively succinct sections of the JOBS Act respecting new private placement and Regulation A rules, Title III sets forth the statutory requirements for crowdfunding transactions in extensive detail.

Despite a December 31, 2012 deadline to finalize Regulation Crowdfunding, the SEC released final rules on October 30, 2015.

I. Volume Limitations

A crowdfunding transaction will be exempt provided:

  1. the aggregate amount sold to all investors is not more than $1 million during the 12-month period preceding the transaction, and
  2. the aggregate amount sold to any investor during the 12-month period preceding the transaction does not exceed

    1. the greater of $2,000 or 5 percent of the annual income or net worth of such investor, if either is less than $100,000, and
    2. 10 percent of the annual income or net worth of such investor, not to exceed an aggregate amount sold of $100,000, if either the annual income or net worth of the investor is equal to or is greater than $100,000.

The JOBS Act does not make the crowdfunding exemption available to any issuer that:

  1. is not organized under and subject to the laws of a state or territory of the United States or the District of Columbia;
  2. is subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act");
  3. is an investment company, as defined in the Investment Company Act of 1940, as amended (the "Investment Company Act");2 or
  4. the SEC, by rule or regulation, determines not to be entitled to the benefits of the exemption.

Regulation Crowdfunding largely tracks the language of the JOBS Act with respect to volume limitations. The rules determine an investor's net worth and annual income for the purposes of determining the individual volume limitation using the same method of calculation used for the purposes of determining accredited investor status for natural persons pursuant to Rule 501 of Regulation D.3

The SEC noted that the JOBS Act created statutory ambiguity as to whether the 12-month volume limitation applied to the aggregate of amounts raised in all exempt transactions, or just transactions that involved crowdfunding. However, it determined that the "overall intent of providing the exemption under [Regulation Crowdfunding] was to provide an additional mechanism for capital raising for startup and small businesses and not to affect the amount an issuer could raise outside of the exemption."

Thus, the 12-month, $1 million limit applies only to offerings made under Regulation Crowdfunding specifically. "The opposite approach" the SEC concluded, "would be inconsistent with the goal of alleviating the funding gap faced by startups and small businesses . . ." Issuers would be required to include all securities sold in reliance on Regulation Crowdfunding by entities controlled by or under common control with the issuer, including any predecessor of the issuer. As the JOBS Act did not define "controlled by or under common control with," the SEC proposed to use the term "control" as defined in Rule 405 of the Securities Act.4

Furthermore, the SEC adopted an approach that limited an investor from investing: (1) the greater of $2,000 or 5% of the lessor of the investor's annual income or net worth if either annual income or net worth is less than $100,000; or (2) 10% of the lessor of the investor's annual income or net worth, not to exceed an amount sold of $100,000, if both annual income and net worth are $100,000 or more. In addition to the statutory prohibitions, the SEC excluded from Regulation Crowdfunding any issuer that:

  1. is disqualified pursuant to the "bad actor" rules (discussed below),
  2. has sold securities under the crowdfunding exemption, but has not complied with the ongoing reporting requirements (discussed below) applicable to such issuer under Regulation Crowdfunding, or
  3. has no specific business plan or has indicated that its business plan is to engage in a merger or acquisition with an unidentified company or companies.

To read this Report in full, please click here.


1. VEIKKO ERANTI & JUHO LINDMAN, CROWDSOURCING & CROWDFUNDING A PRESIDENTIAL ELECTION 2 (2013), available at http://ipp.oii.ox.ac.uk/sites/ipp/files/documents/IPP2014_Eranti.pdf.

2. The statute also prohibits private funds from engaging in crowdfunding transactions.

3. 78 Fed. Reg. 66,433-43. The definition of the term "accredited investor" under Rule 501(a) of Regulation D as applied to a natural person is a person: (i) whose individual net worth, or joint net worth with that person's spouse, exceeds $1 million, excluding the value of the person's primary residence and certain related indebtedness (the "net worth test"); or (ii) who had an individual income in excess of $200,000 in each of the two most recent years, or joint income with that person's spouse in excess of $300,000 in each of those years, and has a reasonable expectation of reaching the same income level in the current year (the "income test"). 17 C.F.R. 230.501(a).

4. Id. See 17 C.F.R. 230.405 ("The term control (including the terms controlling, controlled by and under common control with) means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract, or otherwise.")

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions